I have a number of friends who are patent attorneys. Some have strong negative feelings about software patents that mirror mine while others keep me entertained by arguing both sides of the situation with themselves while I sit around and listen. One of my friends – let’s call him Sawyer – has very strong negative opinions as he’s spent most of his time recently defending his clients against software patent suits including an increasing number from patent trolls (non-practicing entities). He spends a lot of time in East Marshall, Texas and has figured out where all the best restaurants are. While East Marshall isn’t quite as nice as an invisible, mysterious island in the middle of the Pacific Ocean, it clearly has a number of similar characteristics. Sawyer has decided that he can’t write publicly about his thoughts and experiences so I’ve agreed to channel his experience into my own parallel universe. Look for more missives from him (and better references from me with regard to Lost as I finally learn what really has been going on.) In the mean time here’s his reaction to the New York Times profile last week on Intellectual Ventures.

Last week there was an article in the New York Times profiling Nathan Myhrvold and his company Intellectual Ventures ("IV"). I suppose since it’s a profile, the article is by nature one-sided, but given how I broke into a cold sweat upon reading it, I was a little surprised at how unbalanced the presentation was on the merits. Mr. Myhrvold is characterized as a savior of inventors while his detractors are those big scary companies who want to infringe patents without compensation to the little guys.

What is the underlying premise of IV as a net positive for innovation and the U.S. economy? The traditional defense is that patents incentivize innovation. That has to mean innovation in a particular field, e.g., "software patents incentivize innovation in software." Let me underscore this point: there is no positive evidence for software patents improving or increasing innovation in software. None. I could make the same statement for pretty much any other field except biotech (which has its own problems that can be explored another time). There are a variety of articles setting forth why patents actually hurt innovation in software particularly, (e.g., the famous Bessen and Maskin working paper on the subject). Note that raw empirical data is hard to come by either way by nature of how the patent system operates, but the lack of positive evidence is telling.

Perhaps Mr. Myrhvold recognizes this, because in the article he says “I’m trying to get inventions that kind of respect as an economic entity.” (Emphasis added). IV apparently incentivizes innovation on…inventions? "Inventions" are actually a term of art in patent law, they are the things for which one can legally be granted patent rights. IV, therefore, seems to admit that it wants to enforce patent rights so that we can…have more patents. Mr. Myhrvold wants to create an entire economic category based on payments to entitles that don’t build, produce, sell, etc, any products, or create anything of value (i.e., that don’t innovate, at least in any useful way that advances human progress), in exchange for not being sued on exclusionary patent rights.

Let’s internalize that for a second. IV has collected over a billion dollars so that it can get more patents. They make no products. They apparently don’t funnel ideas to anyone else who makes products. Heck, the only useful thing I’ve seen out of IV is that mosquito-killing laser that Mr. Myhrvold showed off at TED this year. They collect massive amounts of money for their investors, and funnel much of it into buying and developing more patents. When I talked to a headhunter recently, in the midst of the worst market for legal jobs ever, she told me that the one employer who was always hiring people with experience in patents was IV. So, anecdotally, they hire a lot of lawyers. They set up a lot of shell companies. They sue people, or threaten to sue people, for massive license fees.

Now think about where this money would go otherwise. Microsoft, Apple, and Google, not to mention other large technology companies, have sizable legal departments with teams of attorneys focused full-time on managing the 50+ software patent cases they each are a defendant on. My guess is that they individually spend hundreds of millions of dollars defending and settling such suits per year. Most of the suits are backed by investment funds (here’s an example of one) through shell entities. Many of these funds are backed (with no transparency) by traditional investment banks and hedge funds. What we have, then, is a net outflow, on a yearly basis, of at least several hundred million dollars, from technology companies who "make stuff" and unquestionably innovate, to speculators and investors who don’t. I don’t think that baseline fact is something anyone would question. IV dresses that up in the clothing of "invention," but they’re really just out to capitalize on a broken patent system like every other non-practicing entity ("NPE" as we call them – they hate being called trolls). What kinds of cool products and technologies would that money be used to develop? We’ll never know, I suppose. At the very least we can presume that the pace of innovation in technology is being slowed by this net outflow of capital to non-innovating parties.

One thing I haven’t mentioned is that it isn’t just big companies who get sued. Startups, especially in software, are constantly targetted by patent suits, especially by pseudo-competitors who want to kill more innovative upstarts. How many great companies have been sunk by the costs of patent litigation? Think about it this way – if Facebook had been sued on a social networking patent within a year of its existence, would it be around today? It’s doubtful.

Finally, I think it’s important to address the moral point that’s always in the background when NPE’s talk about their business – having a patent doesn’t mean that you really invented anything, or that the person you’re suing would actually infringe in a rational world (the U.S. Constitution also only allows Congress to grant patents for "promoting progress," not for moral reasons). Patents are legal documents, highly opaque, and the meaning of patent claims rarely, if ever, rationally corresponds to a real world product. Patents are granted through a pseudo-adversarial administrative procedure where highly trained lawyers do their best to push extremely broad claims with extremely sparse/vague disclosure through overworked and underpaid patent examiners. That’s the name of the game. As much as companies like IV want to turn patent enforcement into a moral issue, it isn’t. Patent lawyers are paid to get broad patents, not capture the essence of a real "invention." And alleged infringers, in every case I’ve been involved in at least, don’t flagrantly violate patents. They’re caught unaware, and even when they are aware, have the impossible task of figuring out if they would infringe. It’s really a difficult Catch-22, but the patentees enjoy it, because it allows them to call defendants the "bad guys" while taking the moral high ground.